by Stephen Hurst
The weekend of 6th / 7th July was long forecast to have very low temperatures in some Brazil coffee growing regions. Predicted temperatures were amongst the lowest expected in the country for many years.
Why does this matter?
Brazil is well-known as the world’s largest producer of coffee beans, by a considerable margin. What happens in Brazil matters.
The coffee plant cannot sustain freezing temperatures, its leaves ‘burn’, turn black and fall off. The tree does not produce more. Frosts in Brazil do not affect the crop being harvested at the time of the frost, they affect the production of the following year’s crop
If the Brazil crop is reduced, this can have a profound effect on the commodity coffee price.
Coffee is currently overproduced globally, a prime mover behind the very low commodity coffee prices seen today.
At the start of that week (July 3), the commodity coffee market had risen over 15%. However dramatic this sounds, we are talking about the commodity coffee market rising from a terrible 95 cents/lb. to an equally useless $1.15/lb.
In other words, these rather dramatic sounding moves are moves from the depths to the lesser depths.
Keep in mind, here: a frost in Brazil is not a singular event. Brazil is a vast country. Coffee grows in 8 states located thousands of kilometres apart. Killer frosts bring sub-zero temperatures to swathes of the coffee growing areas, plunging farms into sub-zero conditions often for days at a time. Such killer frosts are extremely rare events.
Coffee production in Brazil used to be more southern-state oriented. Parana, further south, was at a higher frost risk. Over time, production moved north into the Cerrado region of Minas Gerais, almost outside of any existing, potential frost risk – barring climate change, of course. This means that less Brazil coffee production is now exposed to the risk of frost than, say, two decades ago.
It is Friday 5th July (recall that Thursday 4th July is a national holiday in the USA, and the commodity market was closed, by the way). Zero degrees are forecast to extend further north into coffee producing areas than any other cold fronts in recent times. Friday 5th July, ahead of the frost weekend, the commodity market goes down. This, to me, was rather unusual. Who knew what would happen over the weekend? Usually ahead of a frost weekend, a nervous commodity market would rise.
This market reaction could be seen as a precursor. But more later….
Over the weekend of 6/7 July – particularly on Sunday – I received dozens of dramatic photos, videos of people walking across frosty / crusty earth. Car windows frosted up. Commonplace enough in England but a rare event in the coffee areas of Brazil. As Sunday wore on…. more dramatic photos, wild speculation about what had happened, feverish talk.
I became very sceptical about these dramatic stories when I started receiving dozens of identical frost photos from three separate sources, one of whom was not in Brazil at all. The long arm of social media at work, posting photos that would tell the story preferred by the poster without regard to accuracy or relevance. Stories and photos chosen to make a point.
I suppose that for many in the coffee business today, there is no connection as to why this matters. The killer frosts and wild market moves (when Brazil lost millions of bags of production) are in the distant past. The days of the commodity market going up 20% in a single day are over. But these legendary events live in the minds, the very fabric, of coffee producer folklore – and not just in Brazil. Literal fortunes were made (and lost) overnight. Those events will never be forgotten by many coffee producing families, and given today’s terrible low prices, a hint of desperation can be detected. Too much coffee is being produced: what better than a huge Brazil frost to better balance the supply / demand matrix?
I feared for our coffee farm in Pocos de Caldas, an area threatened by some of the lowest temperatures forecast this past Sunday. I was not hoping for a fortune. I was simply hoping our 2020 crop (100 bags) was not wiped out.
Pre-frost weekend estimates put possible Brazil crop losses for 2020 at 1.5m to 2m bags. To put this in perspective, that’s pretty much the entire Costa Rica crop. Imagine you read that the Costa Rica crop for 2020 was entirely wiped out. Gone. People would react with something approaching hysteria. Meanwhile such losses to the Brazil crop did not warrant much comment, and the commodity market seemed to not be fussed. It went DOWN on the day before the weekend.
By Monday 8th July morning, more definition came to crop loss estimates. Field surveys, discussions with producers, analysis of how low temperatures actually went and for how long and where. The big trade houses started weighing in with their estimates of potential crop losses for 2020. 2m bags, 1.5m bags, 800,000 bags, 650,000 bags, 250,000 bags. Importantly, the crop loss estimates were falling significantly SHORT of the numbers anticipated in the lead up to the frost
The commodity market opened down on Monday 8th July, and fell over 4% on that day. It must seem strange to some people that news of perhaps 1m bags of crop losses leads to a fall in the market. It does so because commodity markets are anticipatory markets – and larger crop losses were already factored into the price.
Further time will allow more careful and detailed estimates of crop losses for Brazil 2020, and the winter is not over in Brazil. In fact these days, drought and lack of rainfall in the Sept/Oct/Nov period are much larger risks, and some such climate catastrophe could yet come to pass.
So the drama was over almost before it began – the commodity market was ‘back’ to $1.06/lb.
An old adage in the commodity coffee business goes, “Buy the rumour, sell the fact.” This is an excellent case in point.